The Merkel and Sarkozy plan for Europe, agreed yesterday, will according to Reuters:

[P]ermit automatic sanctions against states that breach an existing deficit limit of no more than 3 percent of total economic output, unless a “supermajority” of states voted against the penalty.

That would reverse the current system where a majority of states must vote to launch a disciplinary procedure.

It would also enshrine a budget-balancing rule in national constitutions across the euro zone, although they gave no detail of the proposed wording.

You need know no more than that to realise just how dangerous this plan is.

But there is one piece of information you need to know about why this is happening. As the FT notes:

In an apparent concession, Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece’s second bail-out.

So we know that this deal is for the benefit of banks and their owners.

What it in effect says is that Keynesian deficit financing is not allowed. And any government that does it will be automatically penalised. Let’s take the UYK as an example of such spending. This data is from the March 2011 budget (I have not updated for the autumn statement yet, but that just slows the recovery):

First of all, Labour almost exactly met the EU requirement pre-crash. But, more importantly, when the crash came what this evidences, as I argued yesterday, is that governments have no control over their income. So this was what happened to UK current income and spending (i.e. spending not related to investment) (same data sources):

The data is right by the way: Labour ran a current surplus in 2006-08: the deficit was solely investment related in that period. But when the crash came it was income that collapsed.

Now what would happen under the Merkel/ Sarkozy plan? Simply that to meet the budget requirement that just as revenues crashed and people faced increased risk of unemployment the government would have to slash spending to balance the books. So there would have been no cuts of the sort we’re seeing now. There would be public services decimated.

Benefits would be slashed.

Class sizes would reach 45.

NHS services would be withdrawn from all but emergencies.

All investment would end.

Police and fire services may be part time.

Ambulances simply would not come.

That’s the scale of what would have been needed to balance our budget.

And of course hundreds of thousands or millions more would have been out of work and without benefit, which would have been slashed.

This is what Merkel and Srakozy would have demanded. And it would have been illegal for governments not to have made those cuts – to destroy the fabric of our society – all to save banking from loss.

1) Consumer spending, and that’s going down due to falling incomes, lack of confidence, rising unemployment and demands for more pension contributions from public sector workers, plus VAT rises.

2) Business investment, and that’s falling because consumers are spending less.

3) Exports, and the Eurozone is now killing those.

4) Government spending.

That’s it. That’s all you need to know about where growth can come from.

And the first three are all in decline, although business is increasingly profitable, perversely (and are lending their profits to government rather than investing it – that and quantitative easing are how the deficit are being paid for).

So, given these facts (for these are facts at present) then there’s only one way to go forward, and that is for the government to spend more. If it doesn’t then the cycle of decline continues. That is inevitable.

And as Keynes said, it spends for a reason: it spends to create jobs. That’s why the spending has to be on the Green New Deal (not the government’s watered down Green Deal) or infrastructure spending paid for by the government – because that’s far and away the cheapest way to fund it (and so getting pension funds to pay for infrastructure directly or subsidising banks to lend to small business makes no sense – the government has to act as organisers, funders, guarantors and so managers of such schemes since this way we get the benefit at lowest cost).

So what Merkel and Sarkozy are doing is banning deficit spending that is the only way to break recessionary cycles. They are actually going to make illegal the only hope we’ve got.

9 Responses to “Merkel and Sarkozy want to turn out the left wing lights over Europe”

It looks as though the right-wing should really be renamed the ‘anti-Keynesian front’, as that seems to be the only thing they have in agreement in the West. Given that the terms left- and right-wing come from the seating position of assembly members relative to the speaker at the start of the French Revolution, it seems that all present-day members have taken their seats already in this battle of ideas.

It’s only catastrophic if we limit ourselves to just the one money in our society. If they won’t let us have any of the official stuff, we’ll use our own stuff and be just fine. I’ll offer Worgl yet again as a reference, though there are others. Right now I think what someone should be doing is getting over to Germany and finding more details of the virtual interbusiness banking system they have there which lets them function independently from the main money supply. No doubt Merkel at least is well aware of it and knows Germany won’t be as crippled as everywhere else would be if their proposals are taken up. We need to be implementing something similar here so businesses can trade. You make the case very strongly above – look at what they’ll do to us if we don’t!

Excellent post. Yes this is exactly what deficit spending menas. Governements will very much be reduced to public mourners in the face of mass unemployment. Meanwhile the other lever with which governments can stimulate demand, so as to ease unemployment, will remain in the iron grip of the inflation-obsessed ECB

Wel, the government, if it has the will, can introduce capital controls and, like Germany and France, cheerfully ignore EU rules that demand we put public procurement to tender in other countries as well as our own.

What exactly are the present austerity measures achieving? They are busy strangling any growth at birth. No businesses will invest despite sitting on mountains of cash. Why? Because there is not enough demand, they surmise, in the economy for it to be worthwhile investing. The government has to borrow in order to balance the books as there is less money coming in in the form of taxes and more going out in the form of redundancy payments and benefits. In other words, their cutbacks have increased borrowing!

There are up to three million families need housing. An estimated 5 million council houses are needed. The infrastructure is falling apart. Our manufacturing industry is dying on its arse.

The government knows full well that mitigating circumstances can be put forward to the EU as regards public procurement to keep it in this country. As regards borrowing and spending, we have our own central bank. EU rules only really apply to the treasury “printing” money. This rule only applies if the treasury DIRECTLY invests in the economy. That is why the government, with its QE programme, is buying back bonds from the banks in order to stick to EU rules on intervention.

Argentina broke free from the IMF and, rather than fall further into penury, they have become one of the fastest growing economies.

Like Germany and France, we can get round or even ignore EU rules. After all, what’s the most the EU can do if we seized back democratic control of our country? Are they going to send the tanks in? No! Besides, it is quite clear that if the EU continue to follow disatrous austerity measures, and all the indicators say they are, there is unlikely to an EU for very much longer!

Not forgetting, of course, that when you’re a country, unless you’re run by a very misguided and out of place Micawber, there’s no need at all to balance the books. The actual need is to cater for the welfare of the population and grant them the ability to trade which necessitated the invention of money in the first place. Let’s not lose sight of that essential in all this!

The problem with saying that bondholders will take some of the pain in a bailout is that it impacts the financing for other euro countries at risk. Who in their right mind would buy the €300bn of Italian bonds needed to be issued next year when you are being told that ECB will not stand behind them and you can lose money despite them being in euros. It would be like the UK government saying that if the deficit gets too big, they will just write off part of the Sterling bonds. If you as a bank or insurer are forced to hold Euro soveriegn bonds as a risk-free instrument, you certainly won’t hold those where there is risk of a loss.